Price Dispersion in the Lab and on the Internet: Theory and Evidence
2004, Rand (Bell) Journal of Economics
Michael R. Baye, John Morgan
Price dispersion is ubiquitous in settings that closely approximate textbook Bertrand competition. We show that only a little bounded rationality among sellers is needed to rationalize such dispersion. A variety of statistical tests, based on datasets from two independent laboratory experiments and structural estimates of the parameters of our models, suggest that bounded-rationality-based theories of price dispersion organize the data remarkably well. Evidence is also presented to suggest that the models are consistent with data from a leading Internet price comparison site.
Michael R. Baye and John Morgan, "Price Dispersion in the Lab and on the Internet: Theory and Evidence," Rand Journal of Economics, Vol. 35, No. 3 (Autumn 2004), pp. 446-449.